The great post-pandemic return to office (RTO) is a polarizing issue in the U.S. labor market.
While many companies want their workers to return to the office for at least a few days a week — seeking better communication, increased productivity and a return on investment (ROE) for their expensive office real estate — the reality is that Americans like working from home (WFH) and the flexibility it provides.
Employers seem to be coming to terms with that fact. After a big push in 2020 to 2022 to bring employees back to in-person work — when the number of days US employees worked from home dropped from 61.5% to more like 30% — the RTO trend stalled in 2023, according to data from Stanford economics professor Nick Bloom and his team.
“WFH levels have become ‘flat as a pancake.’” he recently posted on X. “Return to the Office is dead.”
Here’s why this employment trend is having an eerie impact on commercial real estate across the country.
The impact of office vacancies
The data shows that in November of 2023, the percentage of U.S. employees who are working remotely or have a hybrid working arrangement is sitting at just under 42% and has been sitting at roughly that level since 2021.
Many bustling hubs are now starting to look like ghost towns as office occupancy in the 10 largest U.S. metro areas has been hovering at around 50% this year, according to Kastle data.
“We are three and a half years in, and we’re totally stuck. It would take something as extreme as the pandemic to unstick it,” Bloom recently told CNBC.
Office vacancies on a national level hit a 30-year high of 18.2% in the second quarter of 2023, according to CBRE data — with empty offices or “ghost towers” cropping up from coast-to-coast.
This is a major driver in the overall dive in office property values — an important metric for real estate investors. Shifting office demand could result in a 35% plunge in office values by the end of 2025, according to a recent report from Capital Economics. It also projects that those values are unlikely to recover before 2040.
CBRE’s forward-looking analysis is slightly less grim. It expects the overall office vacancy rate to peak and the average rent to bottom out in late 2024.
“Continued uncertainty about long-term hybrid working arrangements and concerns about the economic outlook are causing many tenants to delay leasing decisions,” the firm explained in its “2023 U.S. Real Estate Market Outlook Midyear Review”.
“Although vacancy rates likely will remain structurally higher in many markets, active tenants in the market suggest that leasing activity will eventually rebound and support the start of an office recovery once economic conditions stabilize.”
Prospects for real estate investors
Not only have office vacancies reduced foot traffic in the “office adjacent” economy — impacting local businesses like restaurants, retailers, convenience stores and hair salons — but it has also dulled investor confidence in the sector.
According to CBRE, commercial real estate investment volumes fell by 64% year-over-year in the same period.
But all is not lost for commercial real estate investors.
With the support of the Biden administration, Lawmakers in cities like San Francisco, New York and Washington D.C. are taking actions to convert vacant offices, hotels and other non-office commercial spaces to multi-family residential properties.
This, they hope, would revitalize their downtowns and address the long-standing supply shortage and affordability crisis in the U.S. housing market.
But commercial-to-residential conversions are not always straightforward, as a top aide to New York Mayor Eric Adams told Yahoo News: “Those are really hard projects” — noting that there’s a lot of red tape around zoning laws and design challenges.
It is important to understand the scale of these projects too. CBRE noted: “While 2023 is shaping up to be a banner year for office building conversions to other uses like residential, they account for less than 2% of total U.S. office inventory.”
Still, if these conversion projects prove successful, this could be a major boon for residential real estate investors — with opportunities through avenues like residential real estate investment trusts (REITs), exchange-traded funds, and crowdfunding platforms.